Near-Term Volatility Creating Long-Term Opportunity in Treasury Wine; AUD 12.30 FVE Maintained

No-moat Treasury Wine Estates is beginning to see improving results following a challenging end to fiscal 2020. As flagged in its first-quarter trading update, this sequential step-up tracks our expectations, and we forecast continued recovery throughout fiscal 2021. But the winemaker is not out of the woods yet, and faces near-term volatility given an ongoing inquiry by the Chinese Ministry of Commerce (and potential tariffs and blocked imports) related to Australian wine. Nonetheless, we think the market is already pricing in this risk. In our note published on Aug. 18, 2020 (“Out of the Frying Pan and Into the Fire: Treasury FVE Still AUD 12.30 but China’s Inquiry Adds Risks”), we peg the downside valuation impact at about 20%, owing to China contributing nearly 25% of the company’s profits in fiscal 2020 by our estimate. As such, the 35% discount offered by shares versus our unchanged AUD 12.30 fair value estimate screens as attractive.